The Global Economy<\/p>\n
Trade and Trade Policy
\n1. (30 points) Study the following table, which shows the maximum output of beer and chips
\nthat the Korea and Bangladesh can produce under constant cost conditions (recall from lecture
\nthat constant cost conditions means that the production possibility frontier will be linear; by
\ncontrast increasing costs means the production possibility frontier will have the curved shape).
\nProduct Korea Bangladesh
\nSmartphones 30,000 12,000
\nGarments 5,000 3,000
\n(a) Graph the production possibilities frontiers for Korea and Bangladesh. In the absence
\nof trade, assume that the Korea produces and consumes 18,000 smartphones and 2,000
\ngarments; Bangladesh produces and consumes 8,000 smartphones and 1,000 garments.
\nIndicate these points on each country\u2019s production possibilities frontiers.
\n(b) Determine the domestic relative price ratio for each country (note: this is the same as the
\nmarginal rate of transformation between these two goods). Explain as clearly as you can
\nhow to interpret this domestic relative price ratio using both terms of the marginal rate
\nof transformation and opportunity costs.
\n(c) According to comparative advantage, should the two countries specialize and trade with
\none another? Explain your answer in reference to relative price ratios. If they do trade,
\nwhich country should specialize in the production of which product? Once specialization
\nhas occurred, what is the increase in output?
\n(d) Suppose that the international price ratio (i.e. the \u201cterms of trade\u201d) is 1 garment for
\n5 smartphones. Assume that 2,000 garments are traded for 10,000 phones. Are the
\nconsumers in Korea and Bangladesh better off? If so, by exactly how much?
\n(e) Now suppose that global demand for phones and garments has shifted, which causes a
\nchange in the terms of trade. The new international price becomes 1.2 garments per 5
\nphones (which is of course equal to 4.17 phones per garment). Assume again that 2,000
\ngarments are traded. How does this shift in the terms of trade affect the gains from trade
\nfor each country?
\n(f) Suppose that demand shifts again and now the global terms of trade are 2 garments per
\n5 phones. Will trade occur? Why or why not?
\n2. (10 points) Traditional trade theory is basically a static theory of international exchange (i.e.
\nit only focuses on a point in time) leading to certain conclusions about the benefits likely to
\naccrue to all participants. Explain both the limitations of this static perspective as well as the
\ndynamic elements that are important (i.e. \u201cdynamic\u201d means refers to trade policy and openness
\nover time). Please describe specific historical examples (other than the examples given in class
\nfrom Korea, the US, and England) to illustrate your points about dynamic trade policy. (Hint:
\nthe Ha-Joon Chang chapters from Bad Samaritans will help you immensely with this problem.)
\n3. (10 points) Use the Logic of Collective Action to analyze a major Korea or international policy
\nissue of your choice (it could either be a policy that successfully passed or one that failed to
\npass).
\nPage 2<\/p>\n","protected":false},"excerpt":{"rendered":"
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